NORSKE SKOG – JUST ITS GREEN BUSINESSES HAVE HIGHER VALUE THAN ITS MARKET CAPITALIZATION

Norske skog is Worlds second largest paper company, that is changing its production capacity from print paper into green renewable packaging, that should be used in fast food chains etc. The company estimates that the renewable packaging should increase EBITDA by 500%. NSKOG is now very cheap – trading at 50% vs its peers. On the top of it it has a portfolio of new renewable business, that have a higher value than its market capitalization. So either its paper business is valued at zero by the market or the market does not yet appreciate the value of its renewable businesses.

The reason for this valuation gap is that everybody in Scandinavia was chasing renewables IPO and neglected NSKOG. This will change with the new communication strategy by the company.

I spoke to the company last week. They do recognize this valuation gap and will focus their communications to demonstrate the value of the renewable businesses and the value creation by its restructuring. It was already reflected in the annual report published last week. I am sure it will be reflected in their Q1 presentation, that will take place on 23 April.

We are long NSKOG. I believe it is an interesting short term play (Q1 presentation should be reflected in wave of research updates by brokers) as well as long term play (capitalizing on the restructuring that the company announced). Pareto says below: We expect more updates on certain projects throughout the year, and combined with recovering paper prices, triggers are lined up for a vast revaluation. We are quite bullish NSKOG.

Valuation still barely reflecting legacy assets

We expect a challenging H1’21 and reduce 2021 estimates following lower publication paper prices. LT outlook is largely unchanged,and capacity closures should rebalance the market from H2. Focus remains on non-paper initiatives and conversion projects. At current market value for CIRCA, NSKOG’s legacy paper assets are trading at modest 3.0x EV/EBITDA’22e with no value assigned to the project portfolio – puzzling in our view. We estimate a SOTP value of NOK 58/share, and see triggers lined up for a revaluation. Buyand TP NOK 50 reiterated.NSKOG due to report Q1’21 results on 23 April at 8:00 CET

We expect EBITDA adj. of NOK 38m for Q1, down from NOK 317m last year. This driven by lower prices for publication paper, down 15-20% y/y. Though efficiency improvements should offset some of the price shortfall. Focus on non-paper initiatives and market outlook for H2’21.

Estimates down on lower prices
We reduce EBITDA’21-22e by 27-3% amid expectations of lower prices for publication paper in H1’21e (5-10% down from H2’20). The market will likely remain imbalanced until volumes from capacity closures are fully taken out (~2.1mt in Europe). As such, we expect prices to recover during H2’21, supported by recent price uptick in North America and Asia.

Buy and TP NOK 50 reiterated
Our SOTP valuation indicates significant revaluation potential as the market barely reflects ‘legacy’ paper assets. Only adding the stake in Circa Group (at market value), we see ~30% upside to current share price. On top of this, several promising projects are coming up – totally neglected in our view. We expect more updates on certain projects throughout the year, and combined with recovering paper prices, triggers are lined up for a vast revaluation. We reiterate Buy and TP of NOK 50/sh.

Below is a summary of Pareto Research on Norske Skog published today:

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